Digital financial services (DFS) have become the leading driver of inclusion for the unbanked around the world, particularly in developing countries, (Internet 1a). DFS has become an important driver of financial inclusion in a growing number of countries.
Some of the biggest bottlenecks to the expansion of digital financial services in Africa are due to rigorous and uncooperative regulatory frameworks which often hinder the growth and uptake of digital financial services. The legal and regulatory frameworks which govern DFS play a critical role in creating an enabling environment for low income and unbanked populations to become financially included.
While strict regulatory processes set out to ensure privacy for consumers and account security, regulation that allows for experimentation in innovative applications and other technologies can foster enabling environments where diverse digital financial solutions can thrive, a strong eco-systems in just as important. (Internet 3). One important aspect within regulation is how the rights and interests of consumers are protected and promoted. Consumer trust is the foundation for achieving sustainable uptake and active usage of DFS, (Internet 4).
1.0 Introduction and Background
This piece looks at the several factors that need to be implemented if digital financial inclusion is to grow in a country. The assumption is that creation of an enabling regulatory environment could increase access and usage of digital financial services that leads to increased financial inclusion, but success will depend on having a proper regulatory framework that does not stifle innovation, as well as strong commitment, support, and coordination from other regulatory bodies.
Focussing on regulation of digital finance, this article supplies a discussion on digital finance and explores the impact of regulation for digitised financial inclusion as will be addressed in the literature. It picks out five (5) key areas of regulation that, if well implemented, can help DFS grow to promote financial inclusion. At a conceptual level, the discussions also address benefits of digital finance, digital financial inclusion, and financial inclusion.
To ensure that DFS grows financial inclusion, the following regulatory requirements need to be achieved:
- A legal basis is necessary for different service providers to assist the underserved and unserved, using alternate delivery channels. Such channels range from banks, nonbanks to third party providers including agent networks.
- Regulation provides guidelines for dealing with the industry e risks that DFS pose to customers and the financial system.
- DFS-specific rules need to be developed that, when implemented and utilised, can (and should) not stifle innovation but promote it and ensure the safety of financial services. The ideal is a balanced or proportionate regulatory system regarding cost of providing the service, cost of the regulator overseeing the systems and the risks inherent in the provision of DFS.
2.0 Objectives of the Study
The main objective of this study is to evaluate how the Key factors of regulation address a specific aspect of creating an enabling and safe regulatory framework for DFS. The five key enablers in discussion are Non-bank E-Money Issuance, (2) Use of Agents (3) Customer Due Diligence and KYC (4) Consumer Protection and (5) Awareness.
- Regulation for improved service provision (SPs)
3.1 Non-bank E-Money Issuance: Clear definition, creating a specialised licensing window for nonbank providers to issue stored-value accounts, adapted prudential risk rules. E-Money Policy Model is to provide guidance on developing proportionate key regulatory and policy measures for enabling, promoting, and enhancing the use of e-money services and products in a country, (Internet 4b). There is a need to create a special licensing window for non-bank financial service providers that can issue electronic money.
3.2 Use of Agents: The goal of regulation is to prevent and investigate fraud, keep markets efficient and transparent, and make sure customers and clients are treated fairly and honestly. The financial regulator should clearly stipulate the operations of e-money agents by an Act that defines agent regulation. The substantial number of agents is a challenge for the regulator. Risks cannot be avoided but mitigated. Customers need to feel safe when dealing with agents and therefore, Supervisors assess providers’ systems for monitoring agents. Another issue of concern to regulators is setting eligibility standards – who can become an agent (or a certain type of agent) and what qualifications are needed.
3.3 Risk-Based Customer Due Diligence (CDD) and Know Your Customer (KYC): Adopting risk-based and proportionate due diligence CDD and KYC as well as anti-money laundering requirements. Regulation at this level will help the SP to understand the type of customer with whom they are dealing. CDD involves performing background assessments and other screening on the customer to ascertain that they are appropriately risk-checked before being onboarded. The system works to prevent financial crimes like money laundering, terrorist financing, human and drug trafficking, and fraud. Supervisors should be aware that potential DFS risks should be accorded the same attention as other financial channels
3 .4 Consumer Protection: A consumer protection approach that recognizes the nuance in the range of DFS providers and products, while providing an appropriately designed approach to the margin of safety (‘risk-based’ approach). The six main pillars of consumer protection should address issues such as (1) redress and dispute resolution mechanisms (2). Fraud prevention (3). data protection and privacy (4) information disclosure and transparency (5). Protection of funds and (6.) encourage Competition.
3.5 Awareness-The importance of increasing DFS-specific knowledge is crucial for
spurring adoption, and the benefits that come from having access to formal financial services. Demand-side challenges such low awareness and trust in DFS, and limited digital and financial literacy are also barriers to effective adoption and usage of DFS. Increased awareness and understanding of DFS are also needed by the consumers to ensure their digital rights (such as right to online privacy) in the rapidly changing digital environment.
4.0 Regulatory bodies
Regulatory bodies are established by governments or other organisations to oversee the functioning and fairness of financial markets and the firms that engage in financial activity.
4.1 The Role of the Central Bank
We find that as the primary regulator of DFS, the model of licensing and regulation the central bank addresses provision of services that will impact the success of DFS provision. In most markets, central banks have evolved from a more restrictive bank-based (institutional) model to an open (functional) ‘enabling’ regulatory model, where an entity is licensed or authorised to provide services and then regulated according to whether its operations by law or regulation (oversight). (Internet 10b). In line with proportional ‘enabling’ regulations, the role provides the most promise for growing national financial inclusion per planned targets.
4.2 The role of the Telco Regulator
The mobile phone has evolved from its basic telecommunications utility to take on a new enhanced role as a ubiquitous payment and value transfer instrument in the economies of developing countries. For telecommunications regulators in particular – the need to ensure that SPs offer a Quality of Service, cybersecurity and that consumers’ data privacy is upheld is of paramount importance among other matters.
4.3 Collaboration of the key Regulators and Service Providers
It is evident that stakeholder engagement and cooperation is critical to tackling capacity gaps and creating an enabling environment for DFS to thrive and grow.
5.0 The Role of Financial Technology
Technological innovations in financial services (fintech) are progressively altering the way financial services are provided. This revolution opens prospects for low-income populations accessing low-cost financial services but also presents potential risks to consumers and investors.
6.0 Benefits of DFS digitised financial inclusion
Inclusive DFS ecosystems and a clear regulatory framework with access to information- is what is referred to as an enabling environment. This will offer end-users great benefits through various products and services that lead to financial inclusion.
The benefits include:
- Access to affordable financial services, critical for poverty reduction and economic growth.
- Access to and use of basic financial services—can reduce poverty, increase resilience, and improve the lives of the poor. Financial services help boost earning capacity by enabling investments in education, health, housing, businesses and smooth consumption that bolster resilience to products and remittances and other basic services, (Internet 12).
- The underserved and unserved will get access to financial services like cash payments, savings, and credit, etc.
- Confirmation of transactions through electronic notifications.
- Reduction in cash economy as more money is brought into the banking ecosystem
- Promotes the habit of saving, thus increasing capital formation in the country, leading to an economic boost.
- Since interoperability was implemented in most jurisdictions like Zambia, transfers to beneficiary bank accounts, instead of physical cash payments are now possible.
- Availability of credit from formal financial service channels can support prosperity in the countryside.
7.0 CONCLUSION
DFS can facilitate the growth of financial inclusion in a country. SPs offer DFS for financially excluded and underserved populations, building on the digital approaches that improve access channels for those already served by the formal financial sector. As a result, millions of formerly excluded and underserved poor customers are moving from exclusively cash-based transactions to formal financial services — payments, transfers, savings, credit, insurance, and even securities — using a mobile phone or other digital technology to access these products and services.
We must underscore that providing an enabling regulatory environment is critical to the expansion of DFS and financial inclusion.
To drive financial inclusion, DFS must cultivate trust and reliability, and this in turn depends on effective financial consumer protection rules. The approach taken in developing DFS-specific rules built and implemented can (and should) support innovation while encouraging safety. The ideal is a balanced or proportionate regulatory system that facilitates protection but circumvents enforcing undue compliance costs on (often low margin) DFS providers.
References
- Internet: https://www.fsdzambia.org/financial-inclusion-is-digital-the-answer/-
- Internet 1b: https://www.itu.int/dms_pub/itu-d/opb/pref/D-PREF-BB.REG_OUT02-2016-PDF-E.pdf
- Internet 1c: https://www.worldbank.org/en/topic/financialinclusion/overview#1
- Internet 2: https://www.bis.org/publ/bppdf/bispap117.pdf
- Internet 3: https://www.bis.org/fsi/publ/insights23.pdf
- Internet 4: https://www.itu.int/en/publications/Documents/tsb/2017-DFS-ConsumerExperienceProtection/files/basic-html/page12.htm
4B. https://www.afi-global.org/sites/default/files/publications/2019-09/AFI_DFS_Emoney_AW_digital_0.pdf
- Internet 5: https://www.mastercardcenter.org/insights/covid19-shows-small-businesses-the-benefits-of-digital-financial-services
- Internet 6: https://www.cgap.org/sites/default/files/publications/slidedeck/2022_02_Slide_Deck_DFS_Consumer_Risks.pdf
- Internet 7: https://sptf.info/responsible-digital-financial-services
- Internet 8: https://www.centerforfinancialinclusion.org/research/consumer-protection
- Internet 9: https://sptf.info/responsible-digital-financial-services
- Internet 10 http://www.citicolumbia.org/wp-content/uploads/2018/11/Role-of-telco-regulator-in-DFS-for-publication.pdf
- Internet 11: https://nextbillion.net/regulating-dfs-emerging-markets/
Internet 12: https://pubdocs.worldbank.org/en/230281588169110691/Digital-Financial-Services.pdf
